DoD Needs a Real Budget, Not a Partial Fix

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By Lawrence P. Farrell Jr.

As the budget standoff continues on Capitol Hill, it is almost certain that sequester soon will be upon the nation. Automatic, across-the-board budget cuts will affect discretionary spending government wide. But everyone wonders how it will all be sorted out.

Congressional leaders such as Rep. Paul Ryan, R-Wis., chairman of the House Budget Committee and Sen. Patty Murray, D-Wash., who chairs the Senate Budget Committee, have already stated that they expect sequester will happen. That these lawmakers — who are assumed to be key players in the middle of crafting a reasonable path forward — are saying outright that sequester is going to occur is truly astounding.

Right now, the military is suffering for two major reasons. The first one has to do with the impact of declining war spending, known as “overseas contingency operations.” OCO has wound down, and the military has been trying to return certain budget items to the base budget.

Everyone knew this would happen as the rationale for what is funded in OCO and base budgets seemed quite flexible, and money could wash back and forth. The Defense Department now faces the inflexibility of operating under a continuing resolution because its fiscal year 2013 budget has not yet been approved by Congress. The military currently finds itself short of funds in its operations and maintenance (O&M) accounts.

To compensate, the service departments have placed draconian restrictions on O&M spending. For example, only critical travel is now permitted, temporary employees are to be let go, hiring freezes are in place and permanent civilian employees are to give up 22 paid workdays this year. Additionally, major maintenance for aircraft, ships and ground vehicles is anticipated to cease, as is the refueling of a Navy aircraft carrier.

This is just for starters and does not include the effects of sequester. When that happens, things will get much worse.

What the department needs is a real budget, not a continuing resolution. Only with a proper spending plan can the colors of money be properly programmed and O&M expenses addressed. The department has been anticipating an additional bill as the price for escaping sequester — perhaps another $10 billion per year. With a real budget in place, this would be workable.

Another consideration in this discussion is the state of the nation’s economy. It has seen slow growth and extended periods of unemployment, currently at 7.9 percent. Concerns about the long-term picture should be fueled by the release of a new Congressional Budget Office report that looks at economic trends between 2013 and 2023. It projects a 2013 deficit of $845 billion, but additional deficits of $4 trillion over 2013-2022. That compares to last year’s estimate of an additional $2.3 trillion.

This anomaly is explained by the CBO methodology of assuming current laws will remain in place, such as the potential tax increases that didn’t take effect in 2013. Congress and the administration made most of them permanent with the American Tax Payer Relief Act of 2012. And the total deficit for 2014-2023 is now $7 trillion. Revenues grow to 19.1 percent of GDP in 2015, while outlays grow to 23 percent of GDP by 2023. That is the basic reason deficits continue to grow.

CBO analysts point out that there are still unresolved issues. One is whether sequester takes place at all. Another is the statutory limit on debt that needs to be adjusted in mid-May. They noted that if the Medicare “fix” for doctors is adjusted again in 2014, the Budget Control Act of 2011 or sequester is overturned, or certain 2013 tax provisions are extended, the public debt will rise to 87 percent of GDP, versus the 77 percent now projected.

Factors that contribute to these trends are the slow growth of the labor force; the aging population demanding more healthcare and higher subsidies for health insurance; growing healthcare costs; and rising interest payments on the debt. All in all, not a good news story and one certain to get worse as Congress and the administration make adjustments to ease the pain of cutbacks in government services and defense spending. Think reduced food inspections, furloughs of thousands of federal workers, reduced federal grants to states, air travel safety and Federal Aviation Administration services. How about no flying whatsoever for one day a week?

These are all short- to medium-term effects. The real game changer that would cause us to take spending seriously is a projected jump in interest rates in 2017 — when three-month Treasury-bills are projected to go up to 4 percent and 10-year Treasuries above 5 percent. That would more than double interest payments on existing debt. By that time, the debt would be $2 trillion higher. This is a big deal.

Aside from the macro trends, the Defense Department has some serious internal problems. Center for Strategic and International Studies analysts David Berteau and Clark Murdock have produced a revealing new study. Their findings derive from budget analysis by Todd Harrison of the Center for Strategic and Budgetary Assessments.

They point out that because of internal Defense Department inflation — increasing personnel and operational costs — military personnel, operations, maintenance and construction spending will consume the entire projected defense budget in 2021. That would leave no room for investments. To get to a 32 percent investment cushion — what the Defense Department had in 2010 — the size of the force will have to be reduced from 1.5 million today to less than 900,000. And for certain, a new military strategy will have to be derived.

One harbinger of just how serious a fix defense is in can be seen in the pending recall of a Navy carrier battle group from the Persian Gulf as a result of insufficient operational funds. Expect the discussion concerning the defense force of the future to again address the contentious issues of active-reserve mix, pay and benefits, the future of critical acquisition programs, end-strength issues and service budget shares.

The analysis thus far has concentrated mostly on curtailing discretionary spending, but the two-thirds of the budget that remains on automatic pilot — mandatory spending, that is entitlements and interest on the debt — has been left out, as it has so far by Congress, except for a 2 percent hit to Medicare in the Budget Control Act.

In the ultimate adjustment, mandatory spending must be addressed. In the short term, however, expect only a partial fix to all the issues.

It is also safe to predict that sequester may actually happen for a time, until the pain and the outcry become acute and loud enough to propel the country’s leaders to action. And if sequester actually comes to the Defense Department, the administrative issues of process, flexibility, oversight and risk management will prove to be difficult. No matter which outcome unfolds, the Defense Department is in for major adjustments.

Re: DoD Needs a Real Budget, Not a Partial Fix

I hope our enemies are in the same dilemna. We need a leader to emerge to provide some direction for a multi year budget soon or else new and existing programs will stop and human capital will fail to design and manufacture the investment systems that have kept us a little bit ahead in the force multiplier world.

Les Shobe on 03/02/2013 at 15:04

Re: DoD Needs a Real Budget, Not a Partial Fix

You really want to address the elephant then address ineptitudes in fiscal management of Operations and Maintenance (O&M) funding; budget proposals without real basis for their projections, and the subsequent poor job at execution that follows; and uncontained costs in defense programs, many times for obsolete, unnecessary, or redundant capabilities! Some of the language above includes the abhorrent thinking that has led people to believe the Department of Defense’s overrated military and civilian leadership can develop and implement strategies to implement sound business models, practice continuous process improvement, and contain costs! For instance:

“OCO has wound down, and the military has been trying to return certain budget items to the base budget...”

Why were they removed from the base line in the first place? This tells me the budget proposals submitted did not represent daily operating costs. Stand by for the Overseas Contingency Operations (OCO) shakes from funding withdrawals. OCO created addictions that will be felt for generations, especially in the institutional brain trust and professional competencies of personnel born and raised in this period of ‘disposable, single-use’ management vice ‘reutilization’ management philosophy espoused prior to 2001.

One could add our current spending is geared toward removing intimacy from combat which is a debate worthy of column space itself, but we’ll keep attuned to the issue at hand for now.

“Everyone knew this would happen as the rationale for what is funded in OCO and base budgets seemed quite flexible, and money could wash back and forth...”

So, we’re using a ‘slush fund’ instead of a fiscally sound and disciplined approach to managing tax payer dollars, that’s the answer? Here’s a thought, how about knowing what the actual costs are to operate activities here and abroad?

“The military currently finds itself short of funds in its operations and maintenance (O&M) accounts...”

It’s probably because the Department of Defense was slow to realize Overseas Contingency Operations funds were never true operating costs, hence the new focus to capture Home Station Training and other non-contingency operating costs several years into the war. I haven’t met a commander yet who could tell me the purpose of each strategic business unit under their charge let alone the inventory, operating, and overhead costs or create a spend plan. You only need look as far as the spending flurries in 4th quarter funds to exhaust end of fiscal year surpluses amassed from the brilliant guesswork along the continuum.

“To compensate, the service departments have placed draconian restrictions on O&M spending...”

No kidding?!

Ruben Castillo on 03/01/2013 at 17:40

Re: DoD Needs a Real Budget, Not a Partial Fix

Lawrence,

Thank you for all you do. The opinions expressed herein are wholly my own and should not be construed in any way as a statement of policy or position held by my employer.

I have my political persuasions, but I like to base them in fact, not grandstanding. I hear the president's dire warnings about the sequester. But then I hear House members saying it's only 2.4% of the total federal budget. And that it's a Washington kabuki dance, the ole "baseline budgeting" style of "cut", which is only a reduction in the rate of growth, when in fact the year-to-year budget still increases.

Given the DoD's response, the truth must lie somewhere in the middle. I certainly understand that mandatory spending (entitlements, debt payment) is not touched by the sequestor, so the "2.4%" is quite a bit higher relative to discretionary spending. But after adjusting for just discretionary spending by the DoD, is it still really a cut? Or just a cut in the rate of growth? Is the "haircut" approach and the resultant inflexibility it imposes on DoD budget managers the principal villain?

The information you have provided is helpful. But the math still escapes me. Do you have charts or other visual aids that might help us all sort out fact from fiction, minimize political posturing, and distinguish sequester ground truth for the DoD from the rest of the federal budget?

Respectfully,Raider5270, CISSP, CSSLP

Raider5270 on 03/01/2013 at 15:44

Re: DoD Needs a Real Budget, Not a Partial Fix

I guess I'll address the elephant in the room that no columnist wants to acknowledge: This conundrum can be attributed to primarily one politician, our commander-in-chief. He presented himself as a great uniter and proponent of compromise. He has instead proven himself to be one of the most divisive politicians in modern history while babbling about a "balanced approach". He proposed and signed the sequester into law and is now placing the blame squarely on house republicans even though they offered to give him complete control and choice over where and when specific cuts would be made, but he refused so he won't be held responsible or tied to the subsequent consequences. It was stated shortly after he was inaugurated for his first term that he was selected to oversee the "controlled decline" of the US. From everything I've seen over the last four years, that statement holds true. This isn't politics as usual, these are unprecedented times. Hopefully people will start to recognize that soon. I'm glad to see he has so much more flexibility after HIS last election.

Denizen on 03/01/2013 at 14:28

Re: DoD Needs a Real Budget, Not a Partial Fix

This all sounds daunting. If the use of 7.9% Unemployment is a gauge of all the other "official" metrics cited in this article, then everything cited is at a minimum TWICE as daunting.

BareBone on 03/01/2013 at 13:15

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